Memory Chipmakers' Rally Shows No Signs of Abating Amid NACHO Developments

Global Investors Reassess AI Stock Frenzy Amid Rising Inflation and Trade Tensions

The recent Xi-Trump summit has driven home a new reality for global investors, with the "NACHO trade" – short for "not a chance Hormuz opens" – now on the table. This development has led to a sudden turn in risk sentiment, causing global bond yields to rise and the US dollar to strengthen. As a result, the AI stock frenzy is under threat of being knocked off course.

Heading into President Donald Trump's visit to China, the MSCI World Semiconductor Index had rallied 47% this year, seemingly unaffected by the prospect of an energy shortage caused by the Iran war. However, Trump's statement that he did not push China's Xi Jinping to pressure ally Tehran to reopen the Strait of Hormuz disappointed investors who had hoped for a quick resolution to this critical oil trade route.

Traders are now drawing comparisons to 1999, a year marked by the dot-com bubble. The best one-year rolling performance for the Philadelphia Semiconductor Index during that time was 264%. In contrast, the same metric stands at 135% now. With borrowing costs spiking and global investors clearing their positions to reduce leverage, there is a growing fear that the AI stock boom will quickly implode into dust.

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Despite this risk, bulls who believe in an AI-fueled industrial supercycle point to Asia's memory chipmakers as a safe haven. The key reason for this optimism lies in earnings. Asian manufacturers are making more money than ever before, with Samsung Electronics Co. and SK Hynix Inc. expected to be among the world's most profitable companies this year, earning as much as Alphabet Inc. and Microsoft Corp.

The same can be said for Japanese flash-storage producer Kioxia Holdings Corp., which has surged by 19-fold over the last year. Its earnings are nothing short of spectacular, with the latest quarterly results surpassing Toyota Motor Corp.'s. The company is quickly shedding debt and morphing into an undisputed profit center, with management now considering measures to return money to shareholders, including dividends and stock buybacks.

China's ChangXin Memory Technologies Inc., or CXMT, paints a similar picture. In the first quarter, revenue jumped by more than 700% while profit rose to over 20 billion yuan ($2.9 billion). This report card decisively turned the chipmaker from a loss-making endeavor into a profitable enterprise, with CXMT pursuing a blockbuster public listing in Shanghai.

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While the Asian chipmakers are still attractive to momentum chasers, who have used leverage to juice up their returns, the timing is different from that of US-listed AI-infrastructure darlings such as Intel Corp. or Arm Holdings Plc. While the Asian manufacturers are already booking record profits, the investing world is still debating whether Intel can break into the foundry manufacturing business, or if Arm can indeed secure enough suppliers to make central processing unit, or CPU, chips itself.

The biggest danger for the industry is a precipitous drop in demand, which can occur due to the cyclical nature of memory chip manufacturing. Customers often overstock in the good years and deplete their inventories before placing new orders during a downturn.

A big part of the recent rally has been underpinned by analysts' rosy earnings estimates, which are ultimately derived from hyperscalers' bullish outlooks. During this earnings season, the four biggest US tech firms raised their AI spending to as much as $725 billion this year, a jump from an earlier estimate of $650 billion made before the Iran war began in late February, and a 90% increase from 2025. All bets are off if Big Tech scales back its spending sprees.

When the world is this uncertain, and the blockade of a vital passage for global oil supply gets its own acronym, those who can make money now are the winners. Asia's industrial supercycle is not over yet.